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Who would have believed that the world could shoulder an oil price that reached a record high in New York last week of $105 a barrel?
I think those shoulders are sagging a bit.
Those shoulders are not only sagging, those shoulders may be about to collapse. J.P. Morgan stated yesterday that Banks face "systemic margin call," $325 billion hit. This was discussed yesterday over at The Automatic Earth's March 8th Debt Rattle.
Put very simply, last week we saw 6 publicly visible margin calls. In at least 2 of those margin calls, companies were destroyed inside 24 hours. Peloton Funds ($3 billion hedge fund) and Focus Capital ($1 billion hedge fund) ceased to exist last week after margin calls. There are at least 4 other institutions who are staring bankruptcy in the face, ranging from Thornburg Mortgage ($21.7 billion) to Jefferson County, Alabama (unknown size but indications are perhaps $1-$2 billion).
J.P. Morgan above indicates that we are of the verge of a systemic margin call. The margin calls last week demonstrated that financial instruments sold right now, last week, were delivering between 10%-12% of their original booked value. In order to raise $325 billion in capital to cover themselves, the banks will likely have to call in over $3 trillion in loans.
This means your home loan may be called in if you are underwater (and large numbers are) even if you are a good credit risk, pay on time, and still have a job. The banks need capitalization, right now, if J.P. Morgan is correct. Liquidity from the Fed does not help here. They need capital assets to act as collateral in order to borrow from the Fed in the first place and right now they don't have sufficient collateral.
If J.P. Morgan is correct, those shoulders are about to collapse sometime very soon, Robert, perhaps within the next few months. I certainly hope that J.P. Morgan is very wrong or we stand on the verge of a depression that could make the 1930s look like a walk in the park. On this matter I still agree with Westexas - the credit bubble itself was doomed to burst one way or another but I firmly believe that the soaring costs of energy acted as the pinprick that started the unwinding of the largest credit bubble in human history.
isn't it possible that eventually thousands of empty McMansions will be bought for pennies on the dollar by someone with the means. This person will then go about turning the land back into farm land by hiring people (perhaps only paying them in food, which will be enough at that point, other employment being unavailable) to take the houses away, perhaps without machines, oil being also unavailable. These people will then stay and work the land they cleared and the cycle back to medieval serfdom is completed. I was just reading about the "contadini" (work someone else's land in return for half of the yield) in Italy, basically this sytem lasted for hundreds of years up until WW2. It seems viable in that no commuting costs are incurred-- the contadini lived on the land they worked.
isn't it possible that eventually thousands of empty McMansions will be bought for pennies on the dollar by someone with the means.
Yes, but there are 'external costs' that are not controllable.
This person will then go about turning the land back into farm land by hiring people
Here is a partial list of external costs:
Taxes (So you are going to take something of value (a building) then DEVALUING via destruction?
Permits for destruction/waste disposal/even the workers
The locations where the farm topsoil was mostly removed and sold off
Oh, and the population that needs housing - just because a McMansion becomes empty does not remove the housing demand that home used to satisfy.
The home builders treated the topsoil on the lot as a salable asset. You find a sprinkle of dirt under what came with the sod. The destruction of such a place is quite endothermic ... unless you throw a match.
The McMansions are a one way investment and a very poor one. Squatters, salvagers, vandalism, and fires are their lot. Shouldn't be all that long before you'll see folks moving into a title free house and the neighbors welcoming them as long as they get heat, lights, and keep the place up a bit. Eric's assessment of this is dead on.
Well, they are growing grass, and many of those lots are fenced in. A garage could work as a barn/stable with relatively minor modifications. That's a pretty good scenario for small-scale livestock production. Fruit trees can also be planted - a little bit of compost & organic matter right in the planting hole will go a long ways. Once there is a good population of livestock in the area, composting can go into high gear, and then the topsoil built up to turn some of those lawns into productive gardens.
Do you have any idea how useless modern lawns are for growing anything other than that monoculture green carpet? Rebuilding a real soil system of any depth takes years. It's one reason I use raised beds instead of trying to til nearly dead lawn with only an inch or two of soil under it anyway.
Likewise with planting fruit trees. Most of my fruit trees are a few years away yet from providing any serious harvest though the orange tree may give me a few oranges this year.
This is not something that can be done instantly, overnight or via mail order and a Fedex shipment for tens of millions of people. Then there is the problem of learning your local environment, its pests, its growing season(s) and the oddities thereof.
It would all be likely to happen over a long time-scale and very informally - deteriorating suburbs, dereliction and arson, and any would-be developer could simply arrange another 'accidental' fire to get rid of the remains of houses in the areas he was interested in, then buy the land as wasteland.
I doubt that they would or could go to the expense of bringing in topsoil, just work around the houses, or maybe rake the existing topsoil a bit thinner.
In reality though, I can't see the land even being used as farmland in the States, they would just be abandoned.
The only reason agricultural land is in relatively short supply in the States is because of high meat consumption and subsidies for the ethanol scam.
The money in the scenario drawn would not allow for either, so no development of waste land would likely take place as agricultural land would not be in short supply absent these.
It's a different matter in Europe with land in much shorter supply, but then again suburbs there are less extensive.
Is good land really so readily available? With fertilizer and herbicide inputs at risk maybe more land will be needed to feed people.
A brilliant summary. But not a realistic one. YOU know what is happening, ugly things, indeed. But you forget, that your central bank, your government and the whole elite in the US ALSO KNOW THIS! Do you really think, that those people/institutions act like sheep? Doing nothing?
- they will sacrifice the $
- they will dump interest rates towards 0%
- they will just forbid the banks to call in loans
- they will pump in massive amounts of money into the system
- there will be coordinated action of all important central banks in the world towards lowering interest rates, regardless of inflation. Add to this international coordinated huge money inflows.
Those steps are already underway, did you notice that? And you know what? These steps are allright.
i noticed the ECB did NOT lower rates last week & at least for now to see central banks not together is greyzone/largi's scenario probably here.
As interest rates near zero other factors come into play...Beyond this point lay dragons...
'In monetary economics, a liquidity trap occurs when the economy is stagnant, the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe, and can contribute to deflation.'
'The monetary authority can increase the overall quantity of money available to the economy, but traditional monetary policy tools do not inject new money directly into the economy. Rather, the new liquidity created must be injected into the real economy by way of financial intermediaries such as banks. In a liquidity trap environment, banks are unwilling to lend, so the central bank's newly-created liquidity is trapped behind unwilling lenders.'
http://en.wikipedia.org/wiki/Liquidity_trap
The rumour is that a giant taxpayer funded bailout (the first of many) is being worked on right now. The key is to make it look like it is helping the sheeple while actually taking their money (through increased government spending) and transferring it directly to the undercapitalized banking sector. The fly in the ointment is that the USA banking sector appears to have zero interest in prudent business operations, so the taxpayer money will likely be pissed away as fast as possible. IMHO, the main problem which is not being addressed is that the shareholders of North American financial institutions have little or no power to control the reckless and self serving actions of upper management and the board. This isn't capitalism at all-the owners of these companies are just chickens to be plucked-call it an "insider business model".
They will forbid banks to call in loans? When that same government is the one that requires them to have some tiny amount of capital and the only way to raise that capital now is to make margin calls?
You live in an odd world, sir. Let's hope the real world is as odd as yours.
"This means your home loan may be called in if you are underwater (and large numbers are) even if you are a good credit risk, pay on time, and still have a job."
I would think there are state laws against banks being able to recall mortgages at any time for any reason.
You would be mistaken. Your house is the collateral for the loan. If the value of your collateral falls below the value of the loan, the lender can demand that you put up additional collateral to match the value of the loan. This is what a margin call really is.
If you don't understand the potential severity of this, please review one of the triggers of the 1929 crash - margin calls, against real estate, no less.
If the lenders push too hard, they should not be surprised if at some point they discover that some people start pushing back. Foreclosing on people who have failed to make their payments is one thing - everyone understands that that might be tragic, but fair. Foreclosing on people that have kept current on their payments is another matter all together, and is sure to provoke not just universal outrage, but popular wrath.
It seems as if the banks would only be hurting themselves by doing that. They would be flooding the market with foreclosed homes when there is already an oversupply, and would get pennies on the dollar. How about car loans? A car loses 20+% in market value as soon as it's driven off the lot.
And I'm sure many consumer protection laws have been enacted since 1929.
Greyzone, you are incorrect. In the area of residential mortgages the lender has recourse only upon missed payments. The value of the home is irrelevant. Additionally, in many states, including California, mortgages foe residential RE are non-recourse; meaning the lender can do no more than take the property back.
Of course, calling in those home loans won't get any bank cash within the seventy-two hours Ilargi says they have. There is another link to an article at today's Automatic earth which mentions that ADM has margin calls of as much as $100 million on any given day.